Indeed, analysts and seasoned negotiators see Tuesday's announcement as the end of a mishandled chapter in Arab-Israeli diplomacy, in which Washington's overriding focus on settlements ultimately failed.

Instead of convening negotiations on borders, Jerusalem, and Palestinian refugees, the process came to a dead end with each side blaming the other for the failure.

"It looked like the American exercise was going into futility,'' says Nabil Shaath, a veteran Palestinian negotiator who alleges that Mr. Netanyahu's stated support for negotiations is insincere. "We are not going back to negotiations with Israelis. It won't work. [Netanyahu] hasn't shown one iota of interest in discussing the permanent settlement.''

Back to the drawing board

US Secretary of State Hillary Clinton is expected to make a policy speech on Friday on the way forward in the Israeli-Palestinian peace process. The Obama administration views progress towards a peace agreement key to improving US standing in the Middle East at a time when it is confronting Iran on its nuclear program, fighting a war in Afghanistan, and trying to withdraw from Iraq.

There is a sense among both Israeli and Palestinian officials that everyone is going back to the drawing board. Some Israeli and American experts believe the time has come for the US to put its own peace principles on the table and pressure the sides into discussions.

After criticizing the idea of returning to indirect talks of earlier this year, Mr. Shaath said the Palestinians are hoping for new US pressure on Israel to rein in settlements. But they've also already come up with an alternative to bilateral talks: seek international recognition of Palestinian statehood.

The US and Israel spent recent months negotiating a three-month extension of an Israeli moratorium on West Bank building starts in return for an incentive package that would have included billions of dollars worth of military hardware. The deal ran aground when the US decided that a new settlement freeze wouldn't yield enough progress in the negotiations to justify what critics said was an exorbitant price tag.

More dovish figures also criticize focus on settlements

The US decision frees Netanyahu from 18 months of US pressure for a settlement moratorium that threatened to spark a political rebellion from right-wing backers and Jewish settlers. The prime minister has argued all along that settlement building is a secondary issue to achieving a final agreement on borders, security, and Jerusalem. That position is shared by Israeli peace process proponents who are much more dovish than the Israeli prime minister.

"The choice of engaging on settlements was a mistake. The focus should not be the process [of peace talks] but the substance,'' says Ron Pundak, an Israeli political scientist who helped hatch the Oslo peace accords of the 1993.

Mr. Pundak says the focus on procedure over the final issues was an effort by US Peace Envoy George Mitchell to reapply his playbook from the peace process in Northern Ireland to the Middle East.

"He put the [Northern Ireland] process on a slow pressure cooker to bring the sides together. He tried to repeat the experience, which didn't work,'' says Pundak, who believes the US needs to publish its own peace principles and convene new negotiations.

To be sure, though Netanyahu has outlasted the pressure for a freeze, his decision to turn down what is considered by many as an overly generous offer of incentives might prompt a different approach in the US toward Jerusalem.

"For the last several months the administration has tried the approach of offering substantial political and military carrots,'' says David Makovsky, a fellow at the Washington Institute for Near East Policy, which supports strong US-Israel ties. "The inability of Israel to see beyond those incentives are going to raise questions about the ability of the Netanyahu government as currently constituted to agree to a long-term political package.''

Even some Palestinians call it a mistake

In the eyes of Palestinians, Israel's refusal of international pressure for a settlement freeze came to symbolize allegations that Mr. Netanyahu wasn't serious about peace. Some, however, criticized President Abbas for making it a precondition for talks.

"The impression of the Palestinians is that the Netanyahu government isn't interested in negotiations, and they see the settlements as symptoms of the policies of the government,'' says Mohammed Dajani, a professor of political science at Al Quds University in Jerusalem. "It was a mistake on behalf of the Palestinians to make it such a big issue.... to return to negotiations is the important thing.''